Risk Interest Soft
Bernanke’s attempts to contain investor fears over early normalization seemed to have worked for no more than 24 hours. Even though he backed up the argument yesterday by warning against premature declarations of ‘victory’ over the economic recovery, the market is coming to realize that there are big differences between no change in policy and more easing, if not only from a balance sheet perspective. Eurozone bourses continue to tread water, following earlier weakness out of the Asia session. Another downward revision to UK GDP, showing an even deeper contraction in Q4, is further sign that key global economies are not going to be sources of much upside news in the near term, though the tools seem to be in place to prevent or mitigate the effects of exogenous shocks. This could be the reason why volatility is failing to pick up despite a dip in volumes, but in general central bankers continue to caution against complacency. Behind the scenes, inflation is still a concern and it’s clear many policymakers are counting on their calls for ‘transitory’ price pressures to be realized in the months ahead. At the very least this gives policymakers more room for manoeuvre in what would likely be a more challenging growth environment, but the fear is that headline prices may yet squeeze consumption too much too soon and by the time a response is given, precious momentum would have been lost. Ahead today US durable goods numbers will act as another leading indicator for output in the US. Markets are looking for a strong rebound in core orders by 1.7%m/m (UBSe. 1%), but may be braced for a downside hit given last week’s troubling PMI prints in Europe and beyond. We continue to see the US enjoying relative data gains in the medium term, though for the Fed (and dollar performance) this point becomes moot if employment does not recover accordingly, and this appears to be where Bernanke is trying to caution the market as the need to adhere to the employment mandate remains a policy priority. Ahead today Secretary Geithner will be commenting on the wires but Fed officials will not feature until tomorrow as there are several speeches to look forward to. Overnight EURUSD traded 1.3314-1.3373 and USDJPY 82.61-83.2.
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UBS Investment Bank